What happened

Shares of used car "vending machine" company Carvana (CVNA 0.82%) dropped by as much as 5.6% in early trading Friday before retracing to about a 1.9% decline as of 10:55 a.m. ET.

A backhanded compliment from JMP Securities and a price target reduction at JP Morgan appear to be the reasons for the decline.

So what

Let's start with the news from JMP Securities (not to be confused with JPM). In a note covered on TheFly.com Friday morning, JMP's Nicholas Jones cut his price target on Carvana -- but only to $45 a share, which is still three times what the stock goes for now. As Jones explained, Carvana is likely to miss its revenue estimates by as much as 7% when it reports its third-quarter numbers early next month. Nevertheless, said Jones, there is "material upside" in Carvana's current depressed stock price, and the company is unlikely to go bankrupt.    

That's right. He used the "b" word.

It's rarely a good sign when Wall Street analysts feel the need to discuss the possibility of a company going bankrupt, even in the negative. So the fact that JMP's analyst felt he had to make a point of saying that Carvana probably won't go bankrupt likely unnerved a lot of investors today. 

It didn't help the stock price that, not long after JMP Securities released its report, JP Morgan announced that it, too, had lowered its price target on the used car seller -- and to less than half of what JMP thinks Carvana will be worth: $20 a share.  

Now what

But let's get back to the bankruptcy question. JMP admits that Carvana is going to miss on earnings next month, and the investment bank cut its earnings estimates for the company for the rest of this year and into 2023 besides. It also said it still sees Carvana's bankruptcy risk as low. But is it, really?

Carvana has never earned a profit in its years as a publicly traded company. On the contrary, it lost $619 million over the past 12 months and reported $2.7 billion in negative free cash flow. If it keeps losing money at this rate, it will burn through its $1.4 billion in cash reserves in just a little over six months -- and will still have $8.6 billion in total debt to contend with.

JMP may think that all adds up to a "low" risk of bankruptcy, but it's certainly not a zero-percent chance. Investors in Carvana are right to be nervous.